(Recasts with deepwater oil assets, adds quotes)

By Sonya Dowsett and Chen Aizhu

MADRID/BEIJING (Reuters) - China's Sinopec Group said Friday it plans to buy 40 percent of Repsol'sdeepwater oil assets in Brazil for $7.1 billion as the Asiangiant expands its presence in resource-rich Latin America.

China has invested heavily in natural resource projectsoverseas to feed its surging domestic economy and is now ontrack to be the biggest foreign direct investor in Brazil for2010 -- underscoring the trend of growing investment flowsbetween big emerging economies that are now less reliant ontraditional partners like the United States.

Sinopec announced the multibillion-dollar agreement justtwo days before Brazilians go to the polls to elect a newpresident. Dilma Rousseff, the handpicked successor of outgoingPresident Luiz Inacio Lula da Silva, is widely forecast to winthe election.

The deal would help Repsol Brasil, a unit of Spain'slargest oil company, develop costly subsalt depositsthat were discovered in 2007 and comprise one of the world'sbiggest petroleum frontiers. Experts believe the vast subsaltarea may hold 50 billion barrels of crude.

"Oil demand should grow, with the global economy recoveringin the coming years," said Erick Scott, an analyst at SaoPaulo-based brokerage SLW. "Brazil is one of the countries withthe most potential for growth because of the subsalt reserves,so that's why they're coming here."

Sinopec is also bidding for oil and gas assets of Brazilianstartup firm OGX worth a potential $7 billion,sources told Reuters last month.

A source at OGX, controlled by billionaire Eike Batista,told Reuters on Friday the deal with Repsol has no effect onnegotiations with potential buyers for assets in the Camposbasin, where most of Brazil's oil output comes from.

"One thing has nothing to do with the other. We should havesomething on that soon," the source said.

Repsol Brasil had filed to sell shares in an initial publicoffering in Sao Paulo, but with the Sinopec deal, the IPO hasbeen canceled, said Miguel Martinez, chief operating officer ofRepsol.

With stakes in 16 offshore exploratory blocks, the companyhas had seven discoveries so far, all of them in the Santosbasin off the coast of Sao Paulo. Repsol Brasil's stakes givethe company control over reserves of 1.16 billion barrels ofoil equivalent (BOE) from the discoveries, according to an IPOprospectus.

More broadly, mergers and acquisitions in Brazil's oilsector could flourish in coming months as global oil companieslook to get a piece of the deepwater reserves.

Licensing rounds to explore oil in the country have beensuspended since 2007 and with voting on Brazil's new oil law onhold for now, the only way for companies to get in on thesubsalt wells appears to be through mergers and acquisitions.

But concerns that changes to Brazilian oil regulationscould spook overseas investors may have been overdone.

The sector has seen a series of deals in recent months,including the purchase by China's Sinochem Corp of a 40 percentstake in the Peregrino field owned by Norway's Statoilfor $3.07 billion in May. Oil majors such as France's Total, Royal Dutch Shell and Britain's BG Group have unveiled plans to invest billions of dollars to tapoil in Brazilian offshore fields.

Repsol shares rose 5.6 percent to a 2-year high of 20.0euros while construction firm Sacyr-Vallehermoso,which holds a stake of about 20 percent in Repsol, jumped 12.7percent. The Chinese stock market was closed for a nationalholiday. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Repsol Insider interview:

Breakingviews column on Repsol deal: [ID:nLDE6900HA]

Factbox on Chinese M&A in resources: [ID:nLDE6900N5]

Factbox on Brazil deepwater oil finds: [ID:nN01243765]

Graphic on large oil finds:

Graphic on Brazil subsalt:

Factbox on Repsol Brasil [ID:nN01252061]

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POTENTIAL FOR MORE DISCOVERIES

Under the terms of the deal, Sinopec wouldsubscribe to a $7.1 billion capital hike in Repsol Brazil.

Merrill Lynch analysts in a note said the implied value of$10.7 billion for the 60 percent Repsol stake compared toanalysts' consensus value for the whole unit at $8 billion to$10 billion.

"It's clearly positive, not only for Repsol but for all oilcompanies that have interests in Brazil," said Jordi Padilla atMadrid-based fund manager Popular Gestion Privada. The firm,with 1.4 billion euros ($2 billion) of assets under management,holds Repsol shares.

Sinopec said the company was targeting the production of200,000 barrels per day oil equivalent from the mostly offshoreblocks.

"It's a large-scale asset of premium quality andpotentially with more discoveries to be made in the future," aSinopec official told Reuters.

Repsol expects production of more than 50 million barrelsper year by 2018-2020 from the Brazil deposits it currentlyholds, Chief Operating Officer Miguel Martinez told ReutersInsider.

The deal, which will require approval from competitionauthorities, is on a par with Sinopec's acquisition of Swissoil and gas explorer Addax for some $7.24 billion, with assetsin Nigeria and Iraq's Kurdistan region.

Repsol, in partnership with Brazilian state-run oil companyPetrobras, has a stake in some of the largerdeepwater subsalt blocks off Brazil's southern coast, includinga 25 percent stake in BM-S-9 which holds the Guara and Cariocafields.

Guara holds 1.1 billion to 2 billion barrels of recoverableoil. Carioca is considered a promising field as well but hasnot yet yielded production estimates. (Additional reporting by Tracy Rucinski in Madrid, ElzioBarreto in Sao Paulo and Denise Luna in Rio de Janeiro; Writingby Elzio Barreto; Editing by Terry Wade, Gary Hill)